Sustainability reporting season is about to ramp up again. In this edition of BDO Sustainability Insights, we explore how defining the business case for sustainability disclosure helps companies select their “best fit” reporting approach amid a fragmented landscape of standards and frameworks.
In some cases, regulatory mandates are the main driver, and on January 1, key compliance milestones arrive for California’s Senate Bill (SB) 261 and the EU’s Carbon Border Adjustment Mechanism (CBAM). We share insights on how climate risk assessments — a crucial underpinning of SB 261 reporting — can help inform organizations’ risk and resilience programs, as well as updates on the revised CBAM.
FEATURED INSIGHT
Is Your Company Using the Right Sustainability Reporting Standard or Framework?
As companies prepare for their next sustainability reporting cycle, one of their first steps may be assessing if the reporting standard or framework they’ve been using is still the best fit. For those issuing their first report, navigating the evolving and complex sustainability landscape can be even more challenging.
Identifying the business case for reporting is key to choosing the sustainability standard or framework that’s most relevant for your company. The “why” driving disclosure often falls into one or more of the following categories.
- Compliance Requirements: For many companies, especially multinationals, sustainability disclosure is compliance driven. Regulatory mandates may outline a prescriptive reporting approach, or they may offer some flexibility.
For example, the European Union’s Corporate Sustainability Reporting Directive (CSRD) requires companies to report in alignment with the set of European Sustainability Reporting Standards (ESRS) applicable to their organization size and type. In contrast, California Senate Bill (SB) 261, which is more narrow in scope, offers companies some latitude. When preparing their climate-related financial risk reports, organizations can follow either the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD), or IFRS S2 an alternative standard for climate-related disclosure from the International Sustainability Standards Board (ISSB).
For companies reporting climate risk for the first time, TCFD may be the more practical choice due to its history of use in the marketplace, which provides a useful resource for peer benchmarking and planning. IFRS S2 may be more suitable for companies that operate in jurisdictions where the ISSB Standards (formally the IFRS® Sustainability Disclosure Standards) are mandated or widely utilized. - Customers and Investors: Customers may require sustainability reporting as a condition for doing business, or disclosure may be driven by the demands of other stakeholders — such as investors looking to assess the sustainability profiles of their holdings.
Customer requests are often fulfilled by completing questionnaires such as EcoVadis or CDP, which in turn reference sustainability reporting standards and frameworks. Scoring principles for the EcoVadis assessment include reporting in accordance with a recognized standard, such as the Global Reporting Initiative (GRI) standards, ESRS, or SASB. CDP’s corporate questionnaire also aligns or partially aligns with several different standards and frameworks.
Investors are looking for decision-useful, high-quality sustainability disclosures and place significant focus on comparability. In addition to consideration of reported data and qualitative statements, investors will be looking to understand how management and boards are using sustainability information to inform governance. Although adoption is in the early stages, the ISSB Standards seek to create a global baseline of sustainability disclosures aligned with investors’ focus on the financial impacts of sustainability-related risks and opportunities. - Peer Activity: Sustainability reporting may be necessary to stay competitive in the marketplace. Conducting a peer benchmarking analysis can help companies identify noticeable gaps in disclosure compared to their competitors.
Although the choice of framework or standard is influenced by a company’s industry, geographic location, and specific stakeholder expectations, our benchmarking has revealed several prominent patterns. Our observations show GRI remains the most common reporting approach, with TCFD also broadly adopted among companies looking to enhance their climate-related disclosures.
Although use of the ESRS had been gaining momentum, there have been declines in adoption this year due to regulatory revisions. This pattern may reverse once the simplified ESRS and CSRD amendments become final. The industry-specific SASB Standards (which are also undergoing a revision) are still being used, though many companies now integrate SASB into broader reporting approaches like the ISSB or GRI. This is especially common in sectors like financial services, healthcare, and energy, where SASB’s materiality guidance remains highly relevant.
Selecting the Best Fit Reporting Approach
A clear understanding of the business case for sustainability disclosure is fundamental to building an effective reporting strategy that aligns with organizational objectives. In addition to fulfilling immediate disclosure needs, a strong sustainability reporting program should provide organizations with data and insights that can be leveraged to help address business challenges, such as building resilience and creating efficiencies.
Contact BDO for help developing a sustainability reporting strategy.
REGULATIONS & STANDARDS
EU Simplifies CBAM Compliance Ahead of Jan. 1 Implementation Date
Lawmakers in the European Union (EU) have finalized a series of revisions designed to simplify compliance with the Carbon Border Adjustment Mechanism (CBAM), particularly for smaller importers. The amendments were introduced under the Omnibus I legislative package and were officially adopted in September.
CBAM introduces carbon costs on certain carbon-intensive goods that originate in non-EU countries when those goods are imported into the EU, with the following goods currently in scope: iron and steel, cement, aluminum, fertilizers, hydrogen, and electricity.
The EU is taking a phased-in approach to CBAM compliance. The legislation’s transitional phase, which began in October 2023 and introduced embedded emissions reporting requirements without associated carbon costs, enBAM ids in December 2025. Full Cmplementation begins on January 1, 2026, and includes direct carbon cost implications which serve as an import tax.
CBAM Revisions Under the Omnibus
- Exemption for Small Importers: Companies importing up to 50 metric tons of CBAM goods per year are now exempt from CBAM obligations, a revision that significantly reduces the compliance burden for small and medium-sized enterprises (SMEs). This replaces the previous exemption for deliveries of up to €150 in value. The exemption does not apply to electricity and hydrogen imports.
- Simplified Authorization & Registration: Importers can continue bringing in CBAM goods during early 2026, even if their CBAM registration is still being processed —provided that they have submitted an application by March 31, 2026. The process for becoming an authorized declarant has also been streamlined via the digital application portal.
- Use of Default Values & Verification Relief: The European Commission has made available default values that can be used to calculate embedded emissions without providing justification on why actual emissions cannot be determined. If actual emissions data is being used, then verification needs to be attained. Using actual data may represent lower embedded emissions resulting in minimized or avoided carbon costs.
- Carbon Tax Due Dates: CBAM certificates can be purchased to offset the embedded emissions value. The deadline to declare embedded emissions in imports and surrender CBAM certificates is now September 30 each year, with the first submission required in 2027 for 2026 imports. This gives businesses more time to quantify and verify their emissions, and to purchase CBAM certificates than the previous annual May 31 deadline.
- Updated Penalties & Customs Rules: Penalty provisions have been revised, and customs rules — especially for indirect representatives — have been updated to improve clarity and enforcement. Penalty amounts may also be reduced for minor or unintentional errors. From January 2026 onward, CBAM liability is tied directly to the company that is officially registered as the CBAM declarant. If a hired company is listed as the customs declarant and no other party is designated, that company is responsible for CBAM compliance.
Why It Matters
By setting a minimum threshold for CBAM compliance, the EU is exempting many small importers and SMEs from unnecessary regulatory costs, while still upholding its climate objectives. It is estimated that 99% of embedded emissions in covered imports will continue to remain in CBAM’s scope.
Larger importers, however, should begin preparing for compliance. Key steps include applying for authorized declarant status and setting up systems for emissions tracking and, when necessary, verification. Importers must also work to understand the financial and operational implications of CBAM certificate purchases. Although companies have until September 2027 to pay their first carbon costs, the financial obligations apply to imports from the 2026 calendar year.
CBAM obligations may trickle down to U.S. manufacturers and producers of CBAM-covered goods, who may be asked to provide verified emissions data for the materials they supply. While regulatory changes allow for broader use of default emissions values, importers may still prefer to collect actual emissions data to demonstrate lower embedded emissions — and in turn lower carbon cost obligations — compared to the estimated default values.
Contact BDO for help navigating CBAM compliance and developing a climate mitigation strategy.
HOW TO SERIES
How To Perform a Climate Risk Assessment
Learn what a climate risk assessment is and how it can help organizations address compliance requirements, while strengthening resilience and informing enterprise risk management (ERM), business continuity, and resilience strategies.
What is a climate risk assessment?
A climate risk assessment is an analysis of the effects climate change could have on a business or community as well as the measures being taken to prepare and adapt. Assessments identify risks that fall into two categories – physical risks from changing climate patterns, and risks from the transition to a lower-carbon economy. They also identify growth opportunities that can result from taking action to limit climate risk. For example:
- Physical risks may include extreme weather-related damage to assets, disruptions to operations and supply chain, and reduced insurability and/or higher premiums.
- Transition risks may include reduced financing options, delayed or denied development approvals, and exposure to litigation.
- Opportunities may include reduced costs from operational efficiencies, enhanced energy security from onsite renewable power generation and storage, business continuity during adverse climate-related events, or market demand for lower-carbon products.
Why do climate risk assessments matter?
Climate risk reporting is legislated across some jurisdictions. For example, California’s SB 261 requires companies in scope to issue a climate-related financial risk report on or before January 1, 2026. This reporting may also be leveraged for future compliance with the EU’s CSRD, if applicable. Some voluntary reporting mechanisms also cover climate risk, such as CDP, where making these disclosures can help improve scoring.
Beyond compliance, climate risk assessments help organizations determine the key climate-related factors to monitor from an operational standpoint. The assessments can provide insights into the most likely, and also the ‘worst case’ projections for critical factors such as supply chain disruptions, work stoppage, capital costs, impairment of assets, and a shifting competitor landscape or market demand. These findings can be integrated into an organization’s overall risk management system used to inform disaster planning for business continuity and resilience.
How do you perform a climate risk assessment?
BDO’s approach to climate risk assessment begins by pinpointing key locations based on business criticality and attributes unique to the organization’s geographic footprint.
The assessment then maps these locations and integrates historical weather data and climate scenarios, which project future threats such as global temperature levels and associated hazards (e.g., extreme heat, flooding, wildfire, storms). This exercise includes the identification of transition risks and ranks climate risks and opportunities for the organization, based on likelihood and impact over time.
Identified climate risks can be embedded into an ERM program and processes. As part of this effort, we help clients create a roadmap that incorporates key development steps and opportunities for mitigation. The final output includes a Climate Risk Report that can be used to fulfill stakeholder and regulatory mandates, and also inform business and operational strategies.
Contact BDO for help assessing climate risks and leveraging insights for compliance and to strengthen organizational resilience.
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